China Considers Expanding its National Emissions Trading Scheme (ETS)

China is considering expanding its national Emissions Trading Scheme (ETS) by including more sectors and allowing wider participation in trading. Currently, China operates the world’s largest ETS, covering approximately 4.5 billion metric tons (T) of CO2 emissions per year, compared to the 2021 emissions cap of 1.6 billion T in the EU ETS. However, the Chinese ETS currently only covers the power sector, with 2,162 companies participating, including ten state-owned companies responsible for a significant portion of the covered emissions.

Limited trading activity in the Chinese ETS has resulted in restricted pricing upside. Initial prices were around $7 per ton of CO2, representing only around 10% of EU Allowance (EUA) prices. Most transactions (around 83% reported by December 31) have been bulk deals involving a minimum of 100,000 metric tons. These deals are typically conducted between subsidiaries or affiliates of the same company seeking to reallocate emissions within the group at lower costs. Prices for such transactions have averaged 11% lower than the wider market. However, increased participation by more companies in the ETS is expected to enhance liquidity.

China’s Ministry of Environment and Ecology (MEE), which oversees the ETS, has urged companies currently covered by the scheme to engage in trading. The MEE has also authorized investigations into adding other sectors to the national ETS. All eight key emissions-intensive sectors, including thermal power generation, construction materials, steel, petrochemicals, chemicals, non-ferrous metals, paper, and aviation, are expected to be included in the national ETS by the end of 2025 as part of China’s 14th five-year plan. Construction materials and non-ferrous metals industries are likely to be included this year, with a focus on companies in the aluminium and cement sectors. The petrochemical and chemical sectors may follow suit by 2022-23.

There is growing interested in the Chinese ETS from financial institutions, independent carbon trading firms, and international oil companies like BP and Shell, who have established a presence in the regional pilot ETS programs in China. However, these companies are currently prohibited from participating in the national ETS. Additionally, more clarity is expected on offset mechanisms.

Participants in the pilot ETS programs are currently allowed to purchase Chinese-certified emissions reductions (CCERs) to offset up to 5% of their allowance deficits. Market participants anticipate that CCER trading will begin in the national ETS by mid-2022. China’s CCER programs mainly cover renewable energy, forestry carbon sinks, and methane utilization, with total emissions offset volumes reaching 73 million metric tons as of November 2021. The inclusion of CCERs in the national ETS is expected to boost market liquidity.

China’s current targets include peaking emissions by 2030 and achieving carbon neutrality by 2060. However, analysts argue that the generous emissions allowances and low prices in the Chinese ETS are unlikely to drive significant change in the near term.